Newsflash: IRS Hints to a New Voluntary Disclosure Program for Foreign Bank Accounts

Newsflash: IRS Hints to a New Voluntary Disclosure Program for Foreign Bank Accounts
by Asher Rubinstein

IRS Commissioner Doug Shulman yesterday hinted that the IRS may offer another voluntary disclosure program for US taxpayers with non-compliant offshore accounts.

The IRS has long maintained a general voluntary disclosure policy, whereby US taxpayers can correct tax errors and non-compliance (e.g., undeclared income, improper deductions, etc.), so long as the IRS did not already know about the non-compliance. The benefits of such a voluntary disclosure are lower fines and penalties and avoidance of criminal prosecution.

In addition to this long-running voluntary disclosure policy, the IRS offered a specific Voluntary Disclosure Program (VDP) for undeclared foreign accounts, offering a penalty cap of 20% of the highest account balance over the past six years. However, that specific VDP ended on October 15, 2009.

Taxpayers who came forward after October 15, 2009 made their disclosure under the IRS general disclosure policy, rather than the specific VDP and its 20% penalty. Thus, for disclosures made after October 15, 2009, the big unknown is what the penalty would be. As IRS Commissioner Shulman noted, “we understand [taxpayers’] anxiety and are actively considering another predictable voluntary disclosure program, although with higher penalties than for the first group.”

What can we make of the IRS hinting at a new voluntary disclosure program for foreign accounts?

First, we welcome a new offshore voluntary disclosure program as an opportunity for people to bring their foreign accounts into compliance, lower their potential fines and penalties, and avoid criminal prosecution for tax fraud.

Second, we look forward to clarity as to the penalties that will apply to new disclosures. Ever since expiration of the VDP in October 2009, the penalty remains the big unknown. Even IRS agents with whom we speak are flummoxed at the lack of guidance as to what the penalty will be. 20%? Unlikely, because it would reward late filers with the same benefit as if they had enrolled into the VDP before it expired last October. By law, the IRS can take 50% of the value of the account for each year. But in its tax fraud prosecutions, the government has been imposing a 50% penalty for a single year (the year with the highest aggregate account balance). So it seems reasonable that the government would not exceed 50%/single year as a voluntary disclosure penalty, when that seems to be the standard for a criminal defendant. However, there has not been official guidance from the IRS thus far. We expect that a new voluntary disclosure program will provide some explicit guidance. Otherwise, it is unlikely that additional taxpayers will come forward and make disclosure, relying on a leap of faith that the IRS will be lenient in its penalty regime.

What is certain, however, is that the IRS will continue and expand its offensive against those US taxpayers who still maintain non-compliant foreign accounts. A new VDP would be a welcome means for such taxpayers who missed the first VDP to now come forward, correct their non-compliance, avoid criminal prosecution and be able to sleep at night. At the same time that the IRS hinted to the possibility of a new offshore voluntary disclosure program, the IRS also spoke about its plans to move beyond UBS and target other banks, in other countries, and US taxpayers who have undeclared accounts. “We have additional cases and banks in our sights,” said IRS Commissioner Shulman. In an ominous threat to US owners of undisclosed foreign accounts, Shulman stressed that “this has never been about one bank or one country. We’ve produced results and will continue to produce results.” In fact, this firm has information that the IRS investigation has already spread to banks in India and Israel, including HSBC, Bank Leumi and others. A “second chance” for people who still have undeclared offshore accounts would be welcome.

We will be monitoring any developments on these issues. Please contact us for more information about bringing your account into tax compliance.